The present invention relates to methods for administering automatic type reinsurance contracts.
The purpose of insurance is to redistribute risks. Insurers or risk carriers assume portions of the risks of their customers or insureds in exchange for premiums. Insureds may also be referred to as cedants in that they cede risks to a risk carrier or insurer. Reinsurance is used by insurance companies to redistribute their exposure to other insurers. In a reinsurance agreement, an insurer, often referred to as a primary insurer, ceding company, or cedant, transfers or cedes some or all of its exposures and premiums to a reinsurer. The reinsurer then agrees to indemnify the ceding company for a predetermined type and amount of losses sustained. In general terms, any party that transfers risk, through either a primary insurance policy or a reinsurance contract may be referred to as a cedant or a ceding party.
There are two broad types of reinsurance contracts: treaty and facultative. Treaty reinsurance involves an agreement in which the primary insurer agrees in advance to cede certain classes of business or types of insurance to the reinsurer. Under a treaty reinsurance contract, the reinsurer agrees to reinsure some portion of the risk of all of the primary insurer's insurance contracts related to a particular line of business or type of insurance. Individual risks are not underwritten or discussed. The reinsurer relies on the primary insurer to accept only risks that fall within acceptable underwriting criteria and reinsures all risks that fall within the reinsurance treaty agreement. On the other hand, facultative reinsurance involves separate reinsurance agreements for each risk or policy that is being reinsured.
Automatic facultative reinsurance is generally a hybrid between treaty type and facultative reinsurance. Automatic facultative or facultative automatic reinsurance describes a reinsurance program or agreement in which the parties establish in advance criteria (reinsurance criteria) for the types of risks or classes of business to be reinsured which will be automatically covered by the reinsurance agreement, without further underwriting by the reinsurer, and at the election of the primary insurer or ceding party. The criteria established usually relate to the amount of coverage for any risk to be reinsured, the term of coverage, ceding commissions and premiums.
Although treaty type reinsurance usually offers the best rates, reinsurer's are unwilling to provide such reinsurance if the size of the classes of business at issue is too small. In treaty type reinsurance, the underwriting focuses on the performance and underwriting expertise of the primary insurer as a whole for a particular class of business. Whereas with facultative automatic type coverage, more specific underwriting is performed through the establishment of the reinsurance criteria for the ceded policies which will be reinsured.
In treaty type reinsurance, the treaty typically covers all policies written by the primary insurer in the classes of business covered. In facultative automatic arrangements, the primary insurer may have the option of deciding whether or not to cede certain risks or policies.
Under facultative automatic reinsurance agreements, the primary insurer must periodically provide a report to the reinsurer identifying those policies it wants to be reinsured. This report is typically referred to as a bordereau. Any primary insurance contracts listed on the bordereau which meet the criteria of the facultative automatic agreement are then automatically covered or bound. In performing under a facultative automatic agreement, the primary insurer (also referred to as reinsured) remits to the reinsurer, the percentage of premiums it is entitled to under the agreement, less any ceding commission retained by the primary insurer.
Facultative automatic reinsurance agreements also typically permit a primary reinsurer to try to obtain reinsurance coverage for a policy under the automatic agreement even though it does not meet all of the established criteria. The process for doing so, is often referred to as making a request for special acceptance. In such a situation, the cedant submits to the reinsurance underwriter information and remarks to support its request for the special acceptance of the primary insurance policy under the facultative automatic agreement even though not all of the reinsurance criteria are met. The underwriter can accept or deny such a request. The process for doing so typically involves written correspondence, faxes and phone calls.
The primary insurer and the reinsurer generally maintain separate systems for monitoring which primary insurance policies are covered by the facultative automatic reinsurance agreement.